Funds embracing innovation with a mission

Engineering students using a 3D printer.

A growing number of innovation funds are targeting specific socio-economic sectors, rather than fostering innovation across the board. The UNESCO Science Report cites the example of the USA, where the 21st Century Cures Act (2016) includes an innovation fund of US$ 1.75 billion per year for five years for one of the USA’s main science agencies, the National Institutes of Health (NIH), in addition to the usual annual appropriation. The NIH innovation fund ensures multi-year funding for flagship government research projects such as the Precision Medicine Initiative and BRAIN Initiative (1).

Another example is Inova-Agro, a fund targeting the agribusiness sector that was launched by the Brazilian government in 2013. Inova-Agro is what is known as a sectorial fund, a concept introduced into Latin America by Brazil in 1999. The country has since established more than a dozen of these. There are Brazilian sectorial funds for aeronautics, biotechnology, space, hydroresources, information technology, research infrastructure, mining, oil and natural gas, health and soon. The funds receive money via taxes levied on specific industrial or service sectors, such as energy utility companies. Each fund is supervised by a steering committee composed of members drawn from academia, the government and industry.

Other Latin American countries have followed in Brazil’s footsteps. Both Mexico and Argentina have designed sectorial funds for the software industry, for instance. FONSOFT in Argentina and PROSOFT in Mexico provide small and medium-sized enterprises with competitive funding to help them improve their productivity and capacity to innovate. Mexico is also using a sectorial fund known as CONACYT-SENER to reach the targets outlined in its National Climate Change Strategy (2013) for improving energy efficiency and developing ‘clean and green’ technologies.

Sectorial funds extend beyond Latin America

Sectorial funds are not only found in Latin America. Morocco has one in telecommunications, for instance. The National Fund for Scientific Research and Technological Development was adopted by law in 2001, at a time when domestic enterprises funded just 22% of domestic research. Within a decade, this share had risen to 30% (2010). Moroccan telecom operators were persuaded to cede 0.25% of their turnover to fund research in their sector. By 2015, they were financing about 80% of all public research projects in telecommunications supported through this fund.

Malaysia has introduced a similar scheme for its agribusiness sector. With palm oil being the country’s third-largest export after oil and gas and electronics, the government has imposed a cess (tax) on the oil palm industry to fund research in this sector. The fund is managed by the Malaysian Palm Oil Board, a government body, which levies a tax on every tonne of palm oil and palm kernel oil produced. Through this tax, the palm oil industry helps to fund the research grants provided by the, which totalled MYR 2.04 billion (circa US$ 565 million) over the 2000–2010 period. Thanks to this tax, the Malaysian Palm Oil Board commercialized 16 new technologies in 2013 and 20 a year later. Research has led to the development of wood and paper products, fertilizers, bio-energy sources, polyethylene sheeting for use in vehicles and other products made of palm biomass.

In 2013, South Africa launched its own Sector-Specific Innovation Fund. Priority industrial sectors partner with the government through the Department for Science and Technology through a co-funding arrangement for innovation. The fund was created to counterbalance a sharp drop in research spending by the private sector in recent years, even as public research spending has risen. It is hoped that the fund will help South Africa reach its target of spending at least 1% of GDP on research and development. This ratio peaked at 0.89% in 2008 before sliding to 0.73% of GDP in 2012.

In Central Asia, the Turkmen government has introduced a special fund to encourage young scientists to introduce innovative technologies into agriculture; promote ecology and the rational use of natural resources; develop energy and fuel savings; chemical technology and the creation of new competitive products; construction; architecture; seismology; medicine and drug production; and information technology. Kazakhstan’s Science Fund (est. 2006) provides grants and loans for projects in applied research in priority areas for investment. For the period 2007−2012, these were: hydrocarbons, mining and smelting sectors and correlated service areas (37%); biotechnologies (17%); information and space technologies (11%); nuclear and renewable energy technologies (8%); nanotechnologies and new materials (5%); other (22%). According to the United Nations Economic Commission for Europe, about 80% of the funds disbursed go to state research institutes.

India, meanwhile, is hoping to orient technologies developed by the defence industry towards commercial markets for civilian use. The Defence Research and Development Organisation (DRDO) is a major repository of new technologies, since it accounts for about 17% of domestic research spending and just under 32% of the government outlay in 2010. Despite this, military technology has rarely been transferred to civilian industry up to now, unlike in the USA. To remedy this, DRDO launched a joint initiative in 2013 with the Federation of Indian Chambers of Commerce and Industry (FICCI) for Accelerated Technology Assessment and Commercialization. A year later, 26 DRDO laboratories were participating in the programme, while FICCI assessed over 200 technologies from sectors as diverse as electronics, robotics, advanced computing and simulation, avionics, optronics, precision engineering, special materials, engineering systems, instrumentation, acoustic technologies, life sciences, disaster management technologies and information systems.

Start-ups hampered by lack of venture capital

Start-ups and small and medium-sized enterprises often have difficulty accessing venture capital, despite playing avital role in broadening the national innovation culture. In India, for example, about 85% of research is concentrated in six industries which are dominated bya handful of large firms. More than half of business spending on research is distributed across just three industries: pharmaceuticals, automotive and information technology. In its budget for 2014–2015, India’s union government proposed setting up a fund of Rs 100 billion (circa US$ 1.3 billion) to attract private capital in order to provide equity, quasi-equity, soft loans and other risk capital for start-ups. Beneficiaries will include start-ups specializing in frugal innovation.

Iran’s Innovation and Prosperity Fund (est. 2012) is also supporting small and medium-sized enterprises. It offers them tax incentives and pays the partial costs of commercializing knowledge and technology; it also covers part of the interest on bank loans contracted for the purchase of equipment, the setting up of production lines, testing and marketing, etc. The Fund also offers financial support to private companies wishing to set up business incubators and science and technology parks then facilitates the establishment of these centres through such measures as the provision of rent-free premises and tax incentives.

Another example is Azerbaijan. In 2012, the government created a State Fund for the Development of Information Technologies to provide start-up funding for innovative and applied projects in information technology through equity participation or low-interest loans.

Innovation performance down in European Union

The European Union (EU) funds innovation through its seven-year framework programmes and through the national innovation funds of its 28 members. Horizon 2020 is the bloc’s biggest programme yet, with an endowment of close to €80 billion. In July 2015, the European Commission adopted a stimulus package, the European Fund for Strategic Investment, to help the EU achieve its goals of smart, sustainable and inclusive growth by 2020. The fund has raised a few eyebrows, though. Some find its ambition of using €21 billion to leverage a further €294 billion in private investment ‘unrealistic’. Others point out that it dips into the current framework programme, taking €2.7 billion from Horizon 2020. This has led to cutbacks at the European Institute of Innovation and Technology, which funds innovation across the bloc.

The European Fund for Strategic Investment comes at a time when the EU is still shaking off the economic crisis of 2008–2009. According to the UNESCO Science Report, the innovation performance of 13 out of the EU’s 28 members slipped between 2007 and 2014. EU-based companies still account for 30% of research spending by the world’s top 2 500 companies but only two EU-based companies figured in the top ten in 2014, both of them German and both in the automotive sector, Volkswagen and Daimler.

There are concerns that the EU is largely absent from the arena of innovative internet-based companies. Eleven of the 15 largest public internet companies are US-based and the remainder are Chinese. ‘The EU’s attempts to replicate a Silicon Valley-type experience have not lived up to expectations’, regrets the report. European innovation in the pharmaceuticals and biotechnology sectors has likewise been disappointing in recent years.

One sector that has flourished over the past decade is Europe’s environmental industry. In agriculture, environment, health, energy and materials, between one-fifth and one-third of research projects funded within the seventh framework programme between 2007 and 2013 concerned sustainability. Consequently, the EU is on track to reduce its greenhouse gas emissions by 20% over 1990 levels by 2020. ‘Europe is in a historically unique position to usher in a more sustainable society through research and innovation’, concludes the report.

Consensus on the need for ‘green growth’

It is not only in Europe that sustainable development has become a key focus of innovation funds. In 2008, the Rwandan government introduced a National Fund for Environment and Climate Change in Rwanda (FONERWA), which acts as a cross-sectorial financing mechanism to further Rwanda’s objectives of green and resilient growth within the National Green Growth and Climate Resilience Strategy. FONERWA is involved in identifying funding for the pilot ‘green city’ to be launched by 2018. FONERWA’s sixth call for proposals resulted in 14 projects receiving funding. They included the provision of solar power to off-the-grid communities, the construction of micro hydropower plants and rainwater harvesting and re-use. These projects had been put forward by private companies, non-governmental organizations, Rwandan districts and the Ministry of Infrastructure.

Clean energy is even a growing focus in economies reliant on the oil and gas industries. In 2008, Canada's federal government announced that 90% of all electricity generated would come from non-greenhouse gas emitting sources by 2020, including nuclear energy, clean coal, wind and hydroelectricity. In its 2009 budget, the federal government created a Clean Energy Fund of more than CAN$ 600 million to fund various projects, with the majority of the money (CAN$ 466 million) going to carbon capture and storage projects. Canada also has programmes designed to support wind energy, small hydropower, solar thermal, solar photovoltaic, marine energy, bio-energy and so on.

Nor is it always government funds that are driving the development of clean energy technologies. As of December 2013, 57 of Sustainable Development Technology Canada’s more mature companies had received CAN$ 2.5 billion in follow-on financing. Sustainable Development Technology Canada is a non-profit foundation (est. 2001). It operates three funds: the Sustainable Development Tech Fund has used CAN$ 684 million allocated by the federal government to support 269 projects that address climate change, air quality, clean water and clean soil; the NextGen Biofuels Fund supports the establishment of first-of-a-kind large demonstration-scale facilities for the production of next-generation renewable fuels; and the Sustainable Development Natural Gas Fund supports efficient technologies in the residential sector: small-scale affordable combined heat and power units and ultra-efficient water heaters.

Innovation funds may bring in external partners

Given their modest budgets, it is hardly surprising that many developing countries are forming partnerships at home or abroad to promote innovation. In February 2014, the Kazakh National Agency for Technological Development, for instance, signed an agreement with the Islamic Corporation for the Development of the Private Sector and a private investor for the establishment of the Central Asia Renewable Energy Fund.

In 2010, the USA-based Blue Ocean Ventures launched the Lankan Angels Network. By 2014, the investors operating within this network had injected US$1.5 million into 12 innovative Sri Lankan companies, within a partnership with the Sri Lankan Inventors Commission (est. 1979). The Ministry of Technology and Research reported in 2013 that the Commission had disbursed just LKR 2.94 million (circa US$ 22 000) in grants through its own Inventor’s Fund the same year.

In January 2013, the Rwandan Ministry of Education established the Knowledge Transfer Partnership programme, in collaboration with the African Development Bank, to foster industrial development. So far, the programme has sponsored five partnerships between private companies and the University of Rwanda’s two Colleges of Science and Technology and Agriculture and Veterinary Medicine. The company contributes its idea for product or service development and the university provides the appropriate expertise.

Malawi is prioritizing the agribusiness and manufacturing sectors through the Malawi Innovation Challenge Fund, which is endowed with US$ 8 million from the United Nations Development Programme and the UK Department for International Development. Through this competitive facility, businesses can apply for grant funding for innovative projects that have potential for making a strong social impact and helping the country to diversify its narrow range of exports. The fund is aligned on the three clusters selected within the country’s National Export Strategy: oil seed products, sugar cane products and manufacturing. The fund provides a matching grant of up to 50% to innovative business projects to help absorb some of the commercial risk in triggering innovation. This support should speed up the implementation of new business models and/or the adoption of technologies. The first round of competitive bidding opened in April 2014.

Iran’s Innovation and Prosperity Fund also hopes to convince foreign parties to invest in technology transfer and research ‘but this ambition has been somewhat thwarted by the international sanctions’, notes the UNESCO Science Report.

Funds encouraging university-industry ties

Iran’s Innovation and Prosperity Fund is also striving to strengthen university–industry ties. As of December 2014, public and private universities from four Iranian provinces (Tehran, Isfahan, Yazd and Mashhad)had applied to the fund to establish knowledge-based companies in special economic zones.

Many innovation funds encourage co-operation between academia and industry. In Argentina and Mexico, FONSOFT and PROSOFT are doing just that. A 2014 study by the Inter-American Development Bank forecast that, by 2025, Buenos Aires, Montevideo, San José, Córdoba and Santiago would be the five most important poles in Latin America for the development of software and related industries. By that time, business process outsourcing is expected to employ 1.2 million people and generate sales of US$ 18.5 billion in Latin America.